How Can a 'Great Recession' Leave No Recovery?
It’s been forty years since the Greats meant what they said. The Great Inflation wasn’t great for anyone living through it, but it was, in the end, a period of great inflation. The Great Depression needed no clarification or supporting debate, either. In the age of Economics, however, and the dominant role given to central banks, the straightforward convention of naming things as they really are has become a relic of the past.
The Great Moderation was a term coined in 2002 by a couple of Princeton Economists seeking to figure out how things appeared to be so good. They never came up with much of an answer, leaving too much of their study to “good luck.” That, as well as ignoring all the other stuff that wasn’t moderate, would suffice for the term to gain widespread use.
“Somehow” that Great Moderation gave way to a Great Recession. The main of Economic theory still isn’t quite sure how that happened, small wonder after ten years of mostly avoiding the topic. So focused on the stubborn recovery following it have been Economists, they left themselves no time to go back and take more than a quick peak. And why would they? They know what they’ll have to deal with, starting with how the apex of technocracy, the inheritance of the “maestro”, could let something like that happen in the first place.
The mere fact that we are still talking about, and waiting for, recovery a decade after it all started while helpful in allowing central bankers to appear focused exclusively on the future also empirically establishes that the Great Recession wasn’t a recession, either. They no longer live up to their names.
If it wasn’t a Great Recession, then the episode of last ten years (and counting) deserves a tag. It demands a name because it’s one of those periods in history that will be studied and poured over by future generations – once we get past all the living stakeholders who remain vested in steadfastly avoiding the topic (they still argue the economy recovered, only they qualify it beneath their breath with a technically correct “as best as it could”).
Some Economists like Brad Delong have proposed the Lesser Depression as a catchy, historically significant and appropriate name. I think that fits, as might the Lost Decade. The problem with the latter, though, is that Japan got there first, pity them, and we are actually moving like the Japanese toward more than one. After a few more lost years the Lost Decade will be about as accurate as the Great Moderation and the Great Recession.
The marketing here is important, the one thing that central banks have actually done well. If you take a deep and abiding interest in monetary policy, their only successful venture the last half century was being able to transform what during the aptly named Great Inflation was widely viewed as a backward and incompetent institution into general acclaim. That was no small feat, a great one even. Alan Greenspan’s genius wasn’t federal funds, it was pure PR.
In one of the last interviews of his life, famed economist Milton Friedman softly denounced what went on at central banks often in his name.
“The difficulty of having people understand monetary theory is very simple—the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case—the story—in a way that is favorable to the central banks.”
It doesn’t just create an unhelpful, even dangerous, echo chamber; one that would be incapable of distinguishing a period of seeming moderation from the great dangers pervasive during it that risked something greater on the downside than a recession. It is all so blindingly stupid, a Great Stupidity. There are, after all, the people who are presented to the world as the smartest, most competent among us. Top men.
We are reminded on a weekly basis of just how fitting the description might be. This week it was Treasury Secretary Steven Terner Mnuchin who, in Davos of all places, appeared to back a so-called weak dollar policy. As much space as I usually take up for these columns, I may not have enough in this one to detail all the ways it was a stupid, stupid idea.
Start with the premise of the weak dollar’s appeal. Many believe that it is in today’s modern floating currency world a predicate to rebalance the global trade imbalance. China produces all the things we used to, and it’s the exchange value of CNY that created their opportunity at our expense. Force CNY up, and the dollar down, and all that will reverse, or at least enough, to fulfill President Trump’s campaign promises to remake the American economy in its glorious manufacturing past. Make it, dare I write, great again?
Is that what really happened, though? No. There are several misconceptions all piled into this same fit of inanity. Start with the easily established fact the exchange value of the dollar against China’s yuan, or anyone else’s currency, was and is a symptom not the cause. The Trump administration would like to label China’s regime as currency manipulators, and they are. Only the Chinese at this very moment are seeking the exact same thing Secretary Mnuchin is – they want CNY to further appreciate just as it has since early last year!
Conventional wisdom, or at least the same viewpoints that still believe in a Great Moderation, posits that the Bush administration as part of its early 2000’s stimulus intentionally sought out the weak dollar and thus got it. But that leaves out what really happened, for it was during that very period when Ross Perot’s earlier warning finally came to fruition.
In 1992, during that year’s Presidential Campaign when third party candidate Perot prophesized of a “giant sucking sound”, there were, according to the BLS, 16.8 million manufacturing jobs. These were the kind of high paying, breadwinner jobs that had since the industrial revolution carved out a place and capacity for the necessary middle class. Say what you want about the transformation from an industrial economy to an information or services one, you can’t lose those without gaining something equivalent or better in return. That’s what Perot was questioning.
At the end of the year 2000, right on the cusp of what would become the 2001 dot-com recession, there were slightly more manufacturing jobs (17.1 million) in the US than in 1992. Given the dynamic nature of the economy, meaning population growth to begin with, that represented a small reduction in manufacturing as a proportion of the overall labor market. It was hardly a sucking sound, let alone a giant one.
Though the dot-com recession was itself the mildest business cycle trough on record, “somehow” it was utterly devastating to the US manufacturing base moving forward. Between the start of the dot-com recession and the start of the Great “Recession” seven years later, 3.4 million manufacturing jobs had been moved elsewhere. That was an enormous 20% reduction in manufacturing employment. Another 2.3 million were lost during the Great “Recession” itself, for a total contraction of one third. That’s giant sucking.
The part that Steven Mnuchin and his boss President Trump should pay close attention to is the dollar during this period in question. Between the dot-com recession and the start of the Great “Recession”, you might think given the current stance that it stayed way too high. But that’s not what happened, particularly after 2002. The dollar plunged as the sucking sound reached full outbound capacity.
Between April 1995 and July 2001, DXY, the widely followed dollar index that tracks its exchange against the euro (or mark before it), yen, pound, Canadian dollar, Swedish krona, and Swiss not French franc, had risen sharply from around 80 to just more than 120. From there it would fall all the way to 71 – stopping, importantly, the day Bear Stearns failed (merged).
Manufacturing jobs were at least stable as it rose, and then fled in droves while it fell. “Something” doesn’t add up here.
But, Economists protest, a weak dollar makes US goods more competitive on global merchandise markets compared to foreign goods. So, even if we can’t get those back, we can manipulate our currency so as to tip the future trade balance back in our favor. This is as basic a proposition for Economics as the all-powerful, activist central bank with no upper limit in its capacity.
And yet, the US merchandise deficit exploded beyond all historical experience as the dollar fell. We began importing more goods from China and elsewhere despite its very steep drop. The Bureau of Economic Analysis estimates that in the middle of 2001 when the dollar last peaked above 121 (DXY), the quarterly trade balance on goods and services was -$89.4 billion, an already concerning deficit. By the time Bear had failed, it was more than double that, -$186.3 billion regardless of the plunge in the dollar, having been worse at the top of the housing bubble in 2006 (-$199.3 billion).
US exports did rise during that period, quite robustly, but imports surged by a lot, lot more. It didn’t matter that the exchange value was “making them relatively more expensive” because global trade as a whole was increasing given the (bastardized) Ricardian equivalence taking place. They call it today globalization, and while that’s true it’s missing the one final piece that made all these distortions possible (as well as distortions).
That Bank for International Settlements (BIS) estimated after the financial panic that left us in a Great “Recession” the global financial system had undergone rapid qualitative as well as quantitative expansion leading up to the calamity. Writing specifically about the cause of the panic, therefore global “recession”, was at its heart a specific kind of shortage that “somehow” still goes unmentioned today.
“The origins of the US dollar shortage during the crisis are linked to the expansion since 2000 in banks’ international balance sheets. The outstanding stock of banks’ foreign claims grew from $10 trillion at the beginning of 2000 to $34 trillion by end-2007, a significant expansion even when scaled by global economic activity...The year-on-year growth in foreign claims approached 30% by mid-2007, up from around 10% in 2001. This acceleration took place during a period of financial innovation, which included the emergence of structured finance, the spread of “universal banking”, which combines commercial and investment banking and proprietary trading activities, and significant growth in the hedge fund industry to which banks offer prime brokerage and other services.”
From $10 trillion in foreign claims to $34 trillion in seven years (and up from a few hundred billion when Ross Perot was running for President on a kind of Keep America Great platform). It was this very same period where the exchange value of the dollar went from, again, 120 to 70. This was a massive offshore monetary/credit expansion that was the key to unlocking the sucking sound. At 30% growth right up at the end, it couldn’t be anything other than giant. Ross Perot wasn’t wrong, he was early for the one thing missing.
And that was just what the BIS was at the time able (or willing) to measure. As we know from later efforts, the overall size of this offshore dollar pool in all its forms including FX (what I’ve called footnote dollars) is very likely tens of trillions more than that.
It wasn’t the Bush administration in concert with Alan Greenspan’s final flirtation with ultra-low interest rates that made the dollar fall, and it certainly wasn’t all that great. There was, however, a whole lot of stupid on all sides; from the banks that saw only return without any risk; from policymakers and especially central bankers who long before had abdicated their sacred monetary responsibilities; to politicians who thought as long as GDP was some kind of minimally, moderately positive, who cared how or why?
The significance of Bear at the ultimate bottom in DXY, the end of the falling dollar, is paramount. In other words, after just about a decade the dollar has been rising for the very reason that historic American investment bank is no longer with us as a standalone entity. At various times Economists especially in late 2014 and early 2015 tried to paint our currency’s upward movement as a good thing, the world’s preference for the strong US economy over the rest (or at least the “cleanest dirty shirt”). This “rising dollar”, however, represents financial holocaust every time it rises (like everything, it doesn’t go in a straight line, excepting, of course, that previous falling dollar).
Between March 18, 2008, and March 5, 2009, just days before the stock market bottom, DXY went from 71.3 to 89.2. In that nearly one year, there wasn’t a single thing that went right monetarily.
In late April 2011, DXY had come back down to a multi-year low around 73. People were convinced that it wouldn’t stop as if 2002 all over again. Alan Greenspan had written for the Financial Times in November 2010, a week after Bernanke’s Fed had inaugurated QE2, that he was certain the Obama administration was, like Mnuchin this week, purposefully inciting a weak dollar.
Talk of global trade wars accelerated, EM’s in particular were outraged. Treasury Secretary Geithner, former head of FRBNY during the panic, went to CNBC and denied it, saying, “the US would never do that.”
And it didn’t, not that Treasury Secretary Geithner, President Obama or even Alan Greenspan would know. According to the “maestro” in late autumn 2010:
“The best fundamentals for the dollar will come when the economy is growing strongly.”
The US economy experienced two near recessions in between, and overall hasn’t been strong since the immoderate dot-com era in the late nineties. Greenspan’s former Vice Chairman Alice Rivlin admitted quite cuttingly to CNBC last year, “we haven’t seen 3% growth for a long time.” Still, the dollar rose precipitously anyway, and the global economy suffered for it.
What is the common theme in all these things? What was the Great “Moderation”, that ultimately made it the opposite of moderate? Where did Bear Stearns go, and why did so much damage, economic and financial, flow from that point on? How can it be that a recession, even a great one, leaves no recovery? Why are we still stuck here ten years later?
Its those missing four letters. Treasury officials, monetary policymakers, and especially Economists (redundant) all want to talk about the dollar and what they plan for it, or what they think they might do with it. It can only be some level of stupid for want of those letters. And it’s not like all this information is hidden or particularly difficult to parse. Pull up any dollar chart and just match it to what was going on. Nothing good comes from the eurodollar pushing exchange values to extremes on either side.
Official US policy is for a strong dollar, and Mnuchin’s recent absurdity aside that hasn’t changed. But like a great moderation that isn’t moderate, or a great recession that wasn’t a recession, there is no strong dollar anymore. There can’t be.
A strong dollar referred to a very different “rules of the game”, a fixed set of prices and exchange values, along with corrective mechanisms, whereby the value of the dollar meant everything. What counted for strong was the low likelihood that fixed value would ever seriously be challenged, buttressed by an actually (rather than imagined) strong domestic economy as well as internal fiscal and monetary positions.
The fact that the eurodollar moves the dollar all over the place indicates the lack of all those virtuous attributes no matter how many times some official or TV economist talks about robust, strong, or great growth.
In theory, the fix is quite simple; in practice, it will be incredibly difficult, fraught with immense complexities we haven’t yet discovered let alone minimally understood (the BIS didn’t finger footnote dollars until just last September!). The dollar needs to lose those four letters, replacing them with six very different ones. From eurodollar to stable dollar, that’s the end of all this Great Stupidity.
